FTC Attacks Seminar Selling: Business Opportunity Programs Face Broad 11-State Sweep

The Federal Trade Commission and 11 state law enforcement agencies are cracking down on seminar programs that promise consumers the chance to earn money by participating in virtual shopping malls, operating home-based businesses or investing in foreign currencies, among other opportunities.

Many of these offers are advertised through infomercials or other direct mail programs.

The Maryland Division of Securities, for example, obtained an order requiring iMall Consulting Inc., Studio City, CA to cease and desist from violating the Maryland Business Opportunity Sales Act in its sale of training and marketing materials. The company sold business opportunities enabling buyers to create Web sites through training services and marketing materials.

The acts require business-opportunity seminar companies to register in the state of Maryland if they plan to hold seminars there. The act also says that before selling anything, these companies must give a disclosure statement — including information about the company, any litigation and financial statements, among other things — to the Maryland Division of Securities to review beforehand.

In addition, the company has to give a copy of that disclosure statement to attendees at least 10 business days before they can take any payment from them for the seminar.

According to the consent order, iMall did file an application to register for the seminars in Maryland in August 1996, which remained effective until September 1997.

Then, on May 28 and 29, 1997, iMall conducted three free preview seminars at Maryland hotels to promote its business opportunities. At the conclusion of the seminars, iMall representatives registered 15 Maryland residents to attend one of several iMall's “Internet Business Workshops,” which were scheduled to be held June 7.

However, instead of waiting to let customers read over the disclosure statements for 10 days, iMall accepted credit card information and personal checks as payment from registrants for the full tuition fee, or in some cases as a deposit towards the tuition fee, at the end of the seminar. The full tuition for the Internet Business Workshop was $2,995.

“We took the position that the company violated [Maryland Business Law],” said Dale Cantone, an assistant attorney general for the Maryland Securities Division. “Maryland residents have a right to have that document 10 business days before they are asked to pay any money [to the company]. Residents don't have time to read through this documentation at the same time they are signing up for it.”

But not having enough time to look over customer records is not the only complaint people associated with iMall have. Others are concerned about the high price individuals must pay to be on the mall — with little in return.

According to ZDTV, an online news site, an angry group of sales reps who sell space on the mall united in February, posting a “Unification” Web site filled with complaints over the high price they'd paid to become franchisees, with hardly any return.

In more than 40 entries to the site's “Guestbook” section, some said they “never got the support or help to make the business work” and that iMall's hit statistics were “over-over-stated” or “misleading.” Others said they felt “scammed” or “swindled” by their experiences with the online shopping mall.

In addition, entries to the page are filled with comments from those who felt suckered by the promises of success offered to them by Brad Richdale, a Florida businessman known for his infomercials, who obtained the right to resell iMall's training materials and space to other sales reps for whatever price he could get. Reps who bought a license from Richdale could resell iMall's space for a higher price to make a profit.

In order to appease them, iMall offered a refund, not to exceed the sales reps' initial investment, but only in exchange for their silence. While the squeaky wheels reportedly agreed, they may have excluded some of their aggrieved colleagues from sharing in the settlement, ZDTV said.

The FTC order also requires the company to notify the division of any written complaints from Maryland residents and to notify Maryland buyers of the protections under the Maryland Business Opportunity Sales Act.

Cantone said that his office has already been notified of the problem by people who attended the seminar.

iMall is just one company being tracked in the ongoing FTC crack-down, called “Operation Show Time.” The program began last year, when Loretta Kraus, a federal trade investigator in the Denver regional office of the FTC, filed a lawsuit against a large seminar organization based in Salt Lake City.

After filing the suit, Kraus began collecting complaints from state attorney general's offices and secretary of state offices, which track the activities of companies entering their respective states.

Kraus said she found the “whole seminar problem is getting to be pretty immense. These companies come into town, they rent out a hotel room and they set up shop there for a day or two. They fill the rooms with two or three hundred people and then they leave town,” she said.

In addition, she said “in many cases, they are violating consumer protection laws in every state, by representing that people are going to get results from purchasing their business opportunities but that they cannot substantiate.”

She also said many of these companies do not allow people to change their minds after the seminar is completed. But many states, as part of their business laws, have insisted that companies institute 3-day cancellation offers as a protection device for consumers.

Kraus said the seminars often offer free or nominally-priced training programs, which are misleading, because eventually they end up costing participants thousands of dollars, depending on what level of training the customers decide to take part in.

Last October, Kraus began holding monthly telephone conferences between her local office, state officials and the FTC's main office to discuss alleged scams. These conversations led to the investigation sweep.

Currently, law enforcement officials in 25 states and the FTC have joined forces to bring law enforcement actions against perpetrators and to educate consumers to protect themselves. In the first round, 11 states brought 18 cases against seminar operators selling a variety of business and investment schemes. The first round of cases in this sweep was completed, and a second round is scheduled for completion later this year.

The FTC alleges, in general, that these seminars are fraudulent.

“Seminar scam artist are smooth operators,” said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection. “Most have the gracious manner and impeccable grooming that projects the image of responsibility, legitimacy and prosperity. And they should seem prosperous because in the past few years, seminar hucksters have bilked consumers out of millions of dollars and they claim new victims every day.”

Guthy-Renker Not Concerned

While the buzz about the FTC crack-down has spread throughout the industry, seminar-based Internet companies are not that concerned about its repercussions.

“We think that anyone whose business is unethical or misleading has cause to be concerned,” said Eytan Urbas, a spokesperson for Guthy-Renker Corp., Palm Desert, CA, which has a seminar business that teaches attendees about interactive marketing and urges them to buy Web storefronts on its virtual shopping mall, called America's Choice Mall. “Guthy-Renker goes to great lengths and spends a lot of time and effort and money to make sure that we not only meet all legal requirements but that we also live up to our own ethical requirements for good, honest business.”

Another company that sells Internet space on virtual malls through seminars and infomercials along with other business opportunities, that is being targeted in this crack-down is the Home Business Group, St. George, UT.

The Illinois Securities Department, the division of the Secretary of State's office that is responsible for upholding Illinois' securities laws, obtained cease and desist orders for HBG under its Business Opportunity Law of 1995.

This law states, among other stipulations, that companies selling a business opportunity for more than $500 through seminars must be registered in the state.

According to Dirk May, a spokesperson for the Illinois Securities Department, HBG held seminars in Chicago, but did not register for them in the state of Illinois. “[HBG's] lawyers seem to believe that some of the items were sold for less than $500,” May said.

May also said lawyers from HBG requested a hearing in July between themselves and an independent hearing officer who will determine if the company meets the state's orders. If the state wins, HBG has to comply with the order, but it does not have to change its business practice.

While the Illinois Securities Department did not find HBG's practices misleading, the FTC recently announced that HBG and its affiliate, AmeraPress, Inc., Dallas, TX together must pay $500,000 in consumer redress to settle FTC charges that it had violated the FTC Act, which prohibits unfair and deceptive trade practices.

“We alleged deception,” said Kraus. “Essentially, we believe that these companies are telling people that you if you partake in their businesses, you can make a lot of money, and we'll help you make a lot of money doing it. And, in fact, no one has made any money and they are not really in the business to continue a cooperative business relationship with you.”

While the FTC staff has tracked the business opportunity seminar industry for more than a decade, “Operation Show Time” serves as a good reminder to direct response businesses selling legitimate products that “the FTC and states are looking closely at Internet promotions of all kinds, and that almost every state has securities and other consumer protection laws for business opportunities, in addition to federal law,” said Barry J. Cutler, a partner of Baker & Hostetler, Washington, DC, and formerly director of the FTC's Bureau of Consumer Protection.

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